Financial Management How Can Financial

Financial Management

How can financial managers create value through investment and financing decisions?

The role of a financial manager could be classified as part financial analyst, part psychologist. A manager, by assessing the financial health, potential growth, and debts of the organization or household can help set realistic short- and long-term goals for the future growth of the enterprise or the individual. For example, for an individual client, the advisor might suggest how to help a parent simultaneously invest for his or her own retirement and his or her child's college education. Parents might find it tempting to forego investing in their own retirement, given that the child's college attendance at college is looming. However, unlike children parents cannot take out loans they can repay over a long period of time: an advisor can help make a parent cognizant of this fact, and ensure that the individual's savings for one goal is not disproportionate to other legitimate future needs. Additionally, by planning so that a college fund emphasizes higher-risk, higher-yield investments when the child is younger and lower-risk investments when the child is about to matriculate at college, the maximum value can be derived from the parent's savings strategy. Too conservative a strategy can result in a loss of opportunity to profit from high-yield investments; too risky a strategy can result in a loss of the principle.

Similarly, every business must balance its debt with its potential for investment in new equipment or growth. A new enterprise is always risky, given the high likelihood of failure, but a business must also ensure that it budgets enough for public relations and equipment to ensure that it can develop high-quality product and a solid customer base on which to build its reputation. Similar to a personal investment strategist, a canny financial manager for a business will take the 'organizational temperature' and determine what the business needs, at its particular stage in the organizational lifecycle. Goal-setting and strategic planning will involve giving advice regarding resource allocation: for example, a manager can balance the financial benefits of giving workers healthcare and flextime rather than raising salaries, the potential profits gained by staying open longer in terms of sales vs. The additional overhead costs; and the financial benefits of renting vs. owning machinery (Reh 2010).

A financial manager must have a keen understanding of numbers, but he or she must also understand his or her client. When suggesting sources of available funding, for example, the manager must remember some businesspersons wish to retain a high level of control over their organization's vision and decision-making. While venture capitalists can be a valuable source of financing, someone with high ethical standards might shy away from soliciting aid from someone who wishes a controlling interest in the business (Miller 2009). The regular nature of bank payments in exchange for financial independence might be a willing trade-off for someone beginning a new organic bakery, for example. However, a client proposing a very risky e-commerce venture might not be able to find adequate support from a bank at a sufficiently reasonable interest rate.